The Cruel Things President Obama Is Doing To The Labor Market

Commentary by John C Goodman

March 07, 2013

President Obama’s proposal to increase the minimum wage and the health insurance employer mandate will combine to destroy job opportunities for young, unskilled workers in cities and towns across the country.

The minimum wage, currently set at $7.25 an hour, will jump to $9 an hour and be indexed going forward if the president gets his way. The Affordable Care Act (ObamaCare) is already the law of the land and its effects are being felt right now, even though the employer mandate doesn’t go into effect until next January.

With respect to the new health law, the Congressional Budget Office estimates the cost of the minimum benefit package that everyone will be required to have will be $4,750 for individuals and $12,250 for families. That translates into a minimum health benefit of $2.28 an hour for full time single workers and about $3 an hour for someone working 30 hour a week. For family coverage, the cost is $5.89 an hour for a 40-hour-a week employee and $7.85 an hour for a 30-hour-a-week employee.

These are not small changes. They can double the cost of labor in some cases.

The law does not specify how much of the premium must be paid by the employer versus the employee — other than a government requirement that the employee’s share cannot exceed 9.5% of wages for low- and moderate-income workers and an industry rule of thumb that employers must pick up at least 50% of the tab. But the economic effects are the same, regardless of who writes the checks.

Employers have four ways to reduce this burden: (1) the mandate doesn’t apply to firms with fewer than 50 workers, (2) the mandate doesn’t apply to employees who work fewer than 30 hours, (3) the employer doesn’t have to offer or subsidize family coverage and (4) rather than provide health insurance, the employer can pay a $2,000 per (full-time) worker fine.

There are going to be lots of firms that fail to grow beyond 49 employees. But be warned: If an individual owns, say, two or three fast food franchises, the IRS has signaled that it will treat their combined operations as a single business. Also, in calculating the number of full time workers, the IRS is going to count “full-time equivalents.” That means that two workers, each working 15 hours a week, will count as the equivalent of one full-time (30 hour) worker.

As noted, employers are already reacting to ObamaCare. In fact, there was a huge shift to part-time employment in the fast food industry beginning in January. The reason: ObamaCare will employ a 12 month “look back.” That is, in deciding whether a worker is full-time or part-time next January (when the mandate becomes effective) the government will look at the average weekly hours worked in the previous year.

One fast food restaurant owner I talked with (owning 100 franchises) told me that the average work week for their employees has been reduced to 25 hours this year — compared to 38 hours last year.

Employees may be able to work part-time at two different restaurants — both of which avoid the mandate by switching to part-time labor. On the other hand, they may just choose to work fewer hours. The reason: When the effects of the tax law are added to the effects of ObamaCare, a moderate income family will face a 41 percent marginal tax rate.

As a Wall Street Journal editorial calculated the other day, letting part-time workers work more hours can be expensive. If a 29 hour-a-week employee works one more hour for 50 weeks that will trigger a $2,000 fine. Dividing the fine by the additional hours of work, that works out to a $40 an hour penalty.

Bottom line: employment opportunities are being curtailed by the imposition of ObamaCare. Things will be even worse if a 24 percent increase in the cash minimum wage is heaped on top of it.

Economists have traditionally believed that an increase in the minimum wage (as well as mandated benefits) causes unemployment. However, a study by David Card and Alan Krueger found very little employment effect in the fast food industry in Pennsylvania and New Jersey.

You wonder if economists ever talk to employers when they do these studies, however. Because of labor law and tax law, employment in the fast food industry has already been pared to the bone. When I was young, every restaurant had waiters and waitresses who brought food to your table. This service has been priced out of the market in fast food by past increases in the minimum wage, however. Fast food restaurants are getting by with the absolute minimum amount of labor they need to supply their products.

If government imposes higher labor costs on this industry, the restaurants will try to make it up by raising their prices. However, if the customers won’t pay the higher price — as may be the case in poorer neighborhoods — the restaurant will have to close.

Moreover, in order for prices to rise in one market there must be a corresponding decline in other markets. For the economy as a whole, employers can’t raise prices on the average with no change in the money supply.